These cases signify the tip of the coming enforcement wave related to the PPP lending program, as companies of all sizes brace for scrutiny in the wake of certifying “economic uncertainty” in their PPP loan applications.
PPP Program Background
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the PPP, pursuant to which the Small Business Association (SBA) made available to businesses an initial round of $349 billion, and a second round of $310 billion, in loans to fund operational expenses during the COVID-19 pandemic. The PPP program provides up to $10 million in loans to eligible small businesses for payroll and other enumerated obligations, as well as a mechanism for loan forgiveness if the loans were used for appropriate purposes. Further, the CARES Act increased eligibility for the Economic Injury Disaster Loan (EIDL) program and made grants of up to $10,000 available to cover certain operating costs for eligible businesses.
Critically, in submitting a PPP application, borrowers are required to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA has clarified that borrowers must make this certification in good faith, taking into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Read out May 13 alert on this guidance from the SBA.
First Case: Rhode Island, May 5
On May 5, the U.S. Department of Justice announced that criminal charges were filed against individuals seeking to fraudulently obtain PPP loans. Trumpeting the charges as the “First in the Nation,” DOJ charged two men in the District of Rhode Island – David Stavely of Andover, MA, and David Butziger of Warwick, RI – each with one count of conspiracy to make a false statement to influence the SBA and one count conspiracy to commit bank fraud. Additionally, Staveley was charged with aggravated identity theft, and Butziger was charged with bank fraud. According to DOJ, the two men claimed in their PPP application that they had dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses.
Allegedly, Staveley and Butziger discussed via email the creation of fraudulent loan applications and supporting documentations to seek loans guaranteed by the SBA for COVID-19 relief through the PPP – and Staveley claimed in loan applications requesting more than $438,500 that he had dozens of employees at three restaurants he owned, two in Warwick, Rhode Island, and one in Berlin, Massachusetts. An investigation determined that one of the Rhode Island restaurants and the Massachusetts restaurant were not open for business prior to the start of the COVID-19 pandemic, at the time the loan applications were submitted, or at any time thereafter. Moreover, Staveley did not own or have any role in the second Rhode Island restaurant for which he was seeking financial relief. Further, according to court documents, Staveley’s Massachusetts restaurant was closed by March 10.
According to court documents, it was alleged that on April 6, 2020, Butziger filed an application seeking a $105,381 SBA loan under the PPP as the owner of an unincorporated entity named Dock Wireless. Butziger claimed in documentation filed with the bank and in a telephone call with an FBI undercover agent posing as a bank compliance officer that he had seven full-time employees on Dock Wireless’ payroll, including himself. Butziger falsely represented to the agent that he brought the employees on full-time on Jan. 1, 2020 and laid them off at the end of March. Butziger claimed the employees continued to work without being paid through April 2020, and that he would use SBA PPP funds to pay them. Yet the Rhode Island State Department of Revenue had no record of employee wages having been paid in 2020 by Butziger or Dock Wireless. Agents interviewed several of the supposed Dock Wireless employees who reported that they never worked for Butziger or Dock Wireless.
Notably, in bringing the case, DOJ worked in partnership with multiple federal agencies – including the FBI, the IRS, the SBA’s Office of Inspector General, and the FDIC’s Office of Inspector General – demonstrating the seriousness with which federal authorities are treating PPP-related fraud, and the resources to be expended by the government in investigating and prosecuting PPP-related fraud.
Second Case: Georgia, May 13
On May 13, 2020, the U.S. Attorney’s Office for the Northern District of Georgia announced a second PPP fraud-related case, bringing charges against VH1 reality-TV star Maurice Fayne, star of “Love & Hip Hop: Atlanta.” Fayne was charged with bank fraud as a result of his alleged PPP loan application in which he stated that his trucking company, “Flame Trucking,” had 107 employees and an average monthly payroll of $1,490,200. In seeking a loan in the amount of $3,725,500, Fayne certified that the loan proceeds would be used to retain workers and maintain payroll or to make mortgage interest payments, lease payments, and utility payments, as specified under the PPP Rules. The loan was ultimately funded in the amount of $2,045,800.
According to the criminal complaint, within days of receiving the loan, Fayne allegedly used more than $1.5 million of the PPP loan proceeds to purchase $85,000 in jewelry, including a Rolex Presidential watch, a diamond bracelet, and a 5.73 carat diamond ring, to lease a 2019 Rolls Royce Wraith, to make loan payments, and to pay $40,000 for child support. On May 6, 2020, Fayne was interviewed by federal agents and allegedly admitted that he submitted a PPP loan application on behalf of Flame Trucking, claiming that he used the PPP loan proceeds to pay payroll and other business expenses incurred by Flame Trucking.
In bringing the case, the U.S. Attorney’s Office announced that it worked with the FBI, the Atlanta Complex Financial Crimes Task Force, the Gwinnett County Sheriff’s Office, and the SBA’s Office of the Inspector General in investigating the case – again highlighting the significant governmental interest in prosecuting fraud related to PPP loan disbursements.
Third Case: Texas, May 13
On May 13, the U.S. Department of Justice announced charges filed in the Eastern District of Texas against a Texas engineer – Shashank Rai of Beaumont, Texas – for allegedly applying for millions of dollars in forgivable loans guaranteed by the SBA from two different banks by claiming to have 250 employees earning wages when, in fact, no employees worked for his purported business. Rai was charged by criminal complaint with wire fraud, bank fraud, making false statements to a financial institution, and making false statements to the SBA.
According to the government, in the application submitted to the first lender, Rai allegedly sought $10 million in PPP loan proceeds by fraudulently claiming to have 250 employees with an average monthly payroll of $4 million. In the second application, Rai allegedly sought approximately $3 million in PPP loan proceeds by fraudulently claiming to have 250 employees with an average monthly payroll of approximately $1.2 million. According to court documents, the Texas Workforce Commission had no records of employee wages having been paid in 2020 by Rai or his purported business, Rai Family LLC. In addition, the Texas Comptroller’s Office of Public Accounts reported to investigators that Rai Family LLC reported no revenues for the fourth quarter of 2019 or the first quarter of 2020. According to court documents, materials recovered from the trash outside of Rai’s residence included handwritten notes that appear to reflect an investment strategy for the $3 million, which is the amount of money that Rai allegedly sought from the second lender.
DOJ worked with the FHFA Office of Inspector General, FDIC Office of Inspector General, SBA Office of Inspector General, and U.S. Postal Inspection Service in investigating and bringing the case.
The CARES Act created three oversight bodies charged with monitoring the distribution of the stimulus funds: (1) the Office of the Special Inspector General for Pandemic Recovery, within the U.S. Department of the Treasury; (2) the Pandemic Response Accountability Committee; and (3) the Congressional Oversight Commission. These bodies undoubtedly will work with the U.S. Department of Justice, as well as with other federal, state and local law enforcement and investigative entities, to investigate and prosecute companies and individuals committing fraud, or suspected of committing fraud, related to PPP funds.
Businesses that applied for and accepted PPP loans should continue to consult with counsel – including to ensure that PPP funds are allocated and spent appropriately under the SBA’s ever-changing guidance and updated FAQs. Companies should also create a documented record demonstrating all efforts to comply with the law and required self-certifications through all aspects of applying for and using PPP funds – as well as in certifying appropriate use of PPP funds to obtain subsequent loan forgiveness.
If you have questions or concerns, or find yourself in the crosshairs of a potential government investigation regarding the application or use of PPP funds, Klehr Harrison’s white collar defense team is ready to assist in navigating the SBA’s evolving rules and guidance to defend your company and interests.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Author James A. Petkun is a partner in the white-collar defense and government investigations practice group at Klehr Harrison.